The SEC says it’s monitoring GameStop-fueled market volatility for possible wrongdoing

NYSE trader
  • The Securities & Exchange Commission is keeping an eye on the recent market volatility fueled by a short squeeze in GameStop, according to a statement on Friday.
  • “Extreme stock price volatility has the potential to exposure investors to rapid and severe losses and undermine market confidence,” the statement said.
  • The SEC said it is working with regulatory partners to “identify and pursue potential wrongdoing,” according to the statement.
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The massive short-squeeze rally in shares of GameStop this week has caught the attention of the Securities & Exchange Commission.

In a statement on Friday, the SEC said it is monitoring the recent stock market volatility that has been sparked by the trading activities of a Reddit forum called WallStreetBets. The forum has more than six million members that often employ a highly aggressive trading strategy of piling into stocks via out of the money call options. 

Shares of GameStop are up more than 2,000% year-to-date due to the squeeze, and a number of hedge funds caught on the wrong side of the trades have lost billions of dollars.

With the S&P 500 down nearly 3% for the week as of Friday afternoon, speculation has rising that hedge funds have been selling their large cap portfolio holdings to make up for the losses incurred in the recent short-squeeze rallies. 

“The Commission is working closely with our regulatory partners…to ensure that regulated entities uphold their obligations to protect investors and to identify and pursue potential wrongdoing,” the statement said.

The SEC stressed that core market infrastructure “has proven resilient” during this week’s sky-high trading volumes, and warned that extreme stock price volatility has potential to expose investors to severe losses and undermine market confidence.

Read more: GameStop has surged more than 600% in the past week. 3 experts break down where the stock could go from here as Reddit’s army of traders take profits and search for their next targets.

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Reddit-driven GameStop rises as much as 40% in volatile pre-market trading

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GameStop stock soared 135% yesterday as Reddit users did battle with hedge funds

The GameStop stock price rose as much as 40% in pre-market trading on Thursday after more than doubling the previous day and captivating the financial world.

A battle between hedge funds who had been shorting the company’s shares and day traders on Wall Street Bets on Wednesday pushed the GameStop stock price 134.84% to $347.51. GameStop stock has risen more than 700% in the last 5 days.

The video-game store’s stock up 29.64% to $450.50 in pre-market trading by 6.27am ET.

Day traders, organizing their efforts on Reddit and alternative platform Discord, also drove up the prices of heavily-shorted stocks such as cinema chain AMC, hammering short-sellers. The resulting “loss porn” has caused glee among Wall Street Bets members.

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Trading was highly volatile, however, with the stock up around 40% at one point before slipping back. It was set for a less explosive start than on Wednesday, when the price more than doubled at the opening bell.

“Bought at pre-market. Buying more at open. It’s not over til the fat lady sings,” one Reddit user said on the Wall Street Bets forum. Many members rejoiced in the price passing $420 in pre-market, in reference to weed-culture meme.

Other Wall Street Bets targets – many of which have been heavily shorted by hedge funds – fared less well in pre-market trading. A short is a bet that the share price will fall. AMC was roughly flat, Bed Bath & Beyond was down 6.09% and BlackBerry slipped 5.98%.

Nonetheless, said David Madden, market analyst at trading platform CMC Markets, an array of shorted companies “could be in for high volatility again as the short-squeeze tactics might be in play”.

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Madden said he thought the GameStop phenomenon was having wider implications in the markets. US stocks were set to open lower after their biggest fall since October the day before, with short-term economic worries and concerns over vaccine shortages hitting confidence.

“Equity markets are lower again as fears that some hedge funds are scrambling to close out positions in a bid to offset painful losses they incurred when shorting certain stocks that underwent enormous rallies,” Madden said.

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Discord bans r/WallStreetBets server over hate speech amid the group driving GameStop shares through the roof

WallStreetBets
  • Discord banned r/WallStreetBets on Wednesday for repeatedly allowing hate speech.
  • The move came amid the online group fueling a massive rally of GameStop, AMC, and Nokia shares.
  • Discord’s ban coincided with the group having issues with its Reddit forum, briefly knocking it offline.
  • Visit Business Insider’s homepage for more stories.

Discord said on Wednesday it had banned the r/WallStreetBets server for repeatedly violating its policies against hate speech.

“The WallStreetBets server has been on our Trust & Safety team’s radar for some time due to occasional content that violates our Community Guidelines, including hate speech, glorifying violence, and spreading misinformation. Over the past few months, we have issued multiple warnings to the server admin,” a Discord spokesperson told Insider.

“Today, we decided to remove the server and its owner from Discord for continuing to allow hateful and discriminatory content after repeated warnings,” they said.

The move came as Reddit’s r/WallStreetBets, an overlapping online community, has been fueling massive volatility in the stock market over the past several days by driving up share prices for GameStop, AMC Theaters, and Nokia.

While the r/WallStreetBets community originated on Reddit, its members have set up a “server” on the group-chat platform Discord where they also discuss stock-trading plans.

Discord’s ban came as the r/WallStreetBets subreddit had been experiencing on-and-off technical issues – including becoming invite-only for around an hour, according to The Verge – as new users flocked to it. The timing of the ban may have briefly made it more difficult for members to discuss trades.

Moderators of the Reddit community slammed the move.

“We’re suffering from success and our Discord was the first casualty. You know as well as I do that if you gather 250k people in one spot someone is going to say something that makes you look bad. That room was golden and the people that run it are awesome,” they said in a Reddit post Wednesday.

“Discord did us dirty and I am not impressed with them destroying our community instead of stepping in with the wrench we may have needed to fix things, especially after we got over 1,000 server boosts. That is pretty unethical,” they said.

But Discord said its decision wasn’t connected to the group’s discussion of trading activity.

“To be clear, we did not ban this server due to financial fraud related to GameStop or other stocks. Discord welcomes a broad variety of personal finance discussions, from investment clubs and day traders to college students and professional financial advisors,” the spokesperson said. “We are monitoring this situation and in the event there are allegations of illegal activities, we will cooperate with authorities as appropriate.”

Read more: How hedge funds are tracking Reddit posts to protect their portfolios after the Wall Street Bets crowd helped tank Melvin Capital’s short positions

The trading activity generated in large part by the r/WallStreetBets community has wreaked havoc on traditional Wall Street firms, causing GameStop short-sellers alone to lose more than $5 billion on their positions.

The stock market volatility caused the White House to chime in Wednesday to say it’s “monitoring the situation.”

“Our team, our economic team, including [Treasury] Secretary [Janet] Yellen and others, are monitoring the situation,” White House Press Secretary Jen Psaki said at a press conference. “It’s a good reminder though that the stock market isn’t the only measure of the health of our economy. It doesn’t reflect how middle and working-class families are doing.”

Financial regulators and the companies that operate the financial markets have also been keeping a close eye on the situation.

Nasdaq CEO Adena Friedman told CNBC Wednesday that the exchange monitors social media chatter, and will halt trading if they match the chatter with unusual activity in a stock. 

Brokerage firm Ameritrade also restricted trading in light of the massive volume sparked by r/WallStreetBets.

“In the interest of mitigating risk for our company and clients, we have put in place several restrictions on some transactions in $GME, $AMC, and other securities. We made these decisions out of an abundance of caution amid unprecedented market conditions and other factors,” Ameritrade said in a statement Wednesday.

GameStop, AMC, and Nokia were all down slightly in after-hours trading.

Read more: This GameStop thing isn’t funny; it’s stupid

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GameStop explodes 105% higher after Elon Musk’s ‘Gamestonk’ tweet extends the day-trading rally

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Shares in GameStop rose as much as 105% higher at Wednesday’s market open, after billionaire Elon Musk tweeted “Gamestonk!!” in after-hours trading. 

“Stonks” is usually used in investing banter on social media for widely-held stocks.

The Tesla founder posted a link to the popular subreddit WallStreetBets, members of which have piled into GameStop’s soaring stock.

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Billionaire Chamath Palihapitiya also joined the Reddit frenzy by excitedly announcing he bought 50 call options in GameStop with a strike price of $115 and an expiration date of February 19.

Scores of WallStreetBets users have driven the video-game retailer’s stock to record highs, while targeting short-sellers like Gabe Plotkin’s Melvin Capital and Maple Lane Capital.

The online stock-investing chat group now has over 2.4 million members. Their battle against institutional short-sellers on GameStop has led to an eye-popping 750% rally in 2021 as retail traders grabbed the opportunity to make money off a short squeeze of institutional investors.

Insider’s Bradley Saacks and Alex Morrell reported the subreddit added over 25,000 users in the past 24 hours, according to a metadata dashboard run by itself, indicative of how rapidly the group has become the talk of the finance world.

“These are not normal times and while the r/wallstreetbets thing is fascinating to watch, I can’t help but think that this is unlikely to end well for someone,” said Jim Reid, a managing director of cross-asset research at Deutsche Bank.

Legendary investor Michael Burry criticized retail investor behavior on Tuesday for working to boost GameStop’s stock and target Wall Street shorts, calling it “unnatural, insane, and dangerous.”

GameStop shares closed $147.98 a share on Tuesday, but were last trading 105% higher around $301 a share as of 9:50 a.m. ET. 

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One Reddit day-trader claims to have turned $53,566 in GameStop call options into more than $11 million in just over a year

Video games gamers players

A day-trader on popular Reddit community WallStreetBets has claimed they scored an enormous gain on GameStop’s controversial 261% rally this year.

The user going by ‘DeepF—–gValue’ – censored for content – showed he turned an initial investment of $53,566 in GameStop call options into a stack of $11.2 million.

Several Redditors have increased their wealth at the expense of GameStop haters who were betting on the company’s inflated valuation, but this user has so far turned out to be the champion.

Insider has not independently verified the Redditor’s claims of turning a profit on GameStop.

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The trader initially showed his call positions doubling in value three weeks after Michael Burry’s Scion Management called on GameStop to buy back $238 million in shares on August 19, 2019 and a report warning about the dangers of shorting the stock.

An obsession with the video-retailer by online traders has fuelled outsized volatility over the past three weeks, followed by numerous trading halts. Bullish bets began around the time GameStop agreed with activist investor RC Ventures to add three members, including Chewy founder Ryan Cohen, to its board. The board overhaul was largely seen as a positive for the retailer.

Members on the WallStreetBets community piled into the stock on January 13, encouraging one another to push out short-sellers holding bearish positions. The stock closed 51% higher that same day. A handful of retail traders on TikTok also crowed about how GameStop was going to see frenzied buying again. 

GameStop’s shares are up 633% since the end of October and 308% year-to-date. “A wild ride and the retail day traders seem to be targeting and battling institutional shorts at the moment with the former generally winning in recent days and weeks,” Deutsche Bank analysts noted.

What happened with GameStop’s stock is a reminder of how times are changing, according to Edward Moya, a senior market analyst at OANDA. 

“A new army of traders are not focused on valuations, but rather by momentum opportunities they see from Reddit’s WallStreetBets, YouTubers, TikTok, or Robinhood,” he said. “Top research shops will now have to consider how millennial traders are positioning themselves. GameStop does not deserve a valuation over $90, but that might not matter if influencers keep retail traders buying.”

GameStop shares rose a further 14% in pre-market trading Tuesday, to $88.83 per share.

Inside GameStop’s chaotic week in the stock market, which saw Reddit day-traders revolt against a renowned short-seller and send shares spiking

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Chewy founder Ryan Cohen has reaped a 1,700% return from a $76 million GameStop investment he made last year

Ryan Cohen
  • Chewy.com co-founder Ryan Cohen acquired a 12.9% stake in GameStop last year for $76 million.
  • At Monday’s high of $159.18, Cohen’s stake in the video game retailer had swelled to $1.4 billion, good for a roughly 1,700% return.
  • Cohen recently gained three board seats and is pushing the company to transform into a specialized e-commerce retailer. 
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Activist investor Ryan Cohen’s investment into GameStop last year proved to be good timing on Monday after shares exploded higher by as much as 145%.

An epic short squeeze rally, combined with pockets of investor euphoria found on popular trading forums like Reddit’s WallStreetBets, helped propel shares of GameStop to an all-time high of $159.18 in Tuesday trades.

Cohen amassed a 9 million-share stake in GameStop last year at an average price of $8.43, worth $76 million at the time. At it’s intra-day high today, that stake was worth as much as $1.4 billion, representing a return of more than 1,700%.

But Cohen seems to be playing the long-game on GameStop. Through his firm RC Ventures, Cohen had petitioned the board of GameStop to adopt a strategy that would transform the company into a specialized e-commerce retailer of gaming products.

Cohen utilized a similar strategy for his previous company, Chewy.com, which is a specialized e-commerce retailer of pet products. After being acquired by PetSmart for $3.5 billion, Chewy went public and is now trading at a valuation of more than $43 billion.

GameStop seems to have been receptive to Cohen’s proposal, granting him three seats on the board of directors, including one for himself. 

Since Cohen’s first purchase of shares of GameStop on September 14, shares are up as much as 2,317%.

Read more: BANK OF AMERICA: Buy these 31 unheralded stocks as the recovery’s hottest trades of recent months continue to gain strength in 2021

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